Ladies and gentlemen, good day, and welcome to RBL Bank Limited Q4 and Full Year FY ’20 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I would now like to hand the conference over to Mr. Vishwavir Ahuja, Managing Director and CEO, RBL Bank Limited. Thank you, and over to you, Mr. Ahuja.

Thank you. Good evening, ladies and gentlemen, and thank you for joining us for a discussion on RBL Bank’s financial results for fourth quarter and financial year 2020. I’m joined on this call by other members of our management team who will address any questions later that you may have.

I will request you to bear with us as this is going to be a slightly longer presentation than usual, as we would like to go over important areas of our business and balance sheet. This is an unprecedented time we’re living in, and the pandemic continues to impact countries and economies even as we speak. Governments, regulators and policymakers world over have taken a number of economic measures to try and alleviate the impact. The size and scale of the challenge ahead leads us to believe that even India will see a prolonged impact on the economy, industries and small businesses and individuals.

In this backdrop, we continue to be very cautious, conservative and focused on preservation of the franchise. The overriding emphasis at RBL Bank shall be on balance sheet protection, and we will, therefore, continue to tighten risk filters further to manage and preserve credit quality, maintain surplus liquidity and conserve capital and remain well capitalized throughout. Given the macroeconomic situation prevailing pre-COVID, a great deal of this was already accomplished, but the current environment has made it all the more important.

Before we get into details, I want to take a brief moment to place on record our sincere appreciation and gratitude to all our employees across the bank. Over the last month and more, these employees have been working tirelessly and ensuring that there is minimal impact, if any, to bank’s customers and our operations. Primary focus has been on taking care of the health and safety of the employees, as only then can they effectively serve the customers and community. The bank was proactive in setting up quick response team to handle the entire COVID situation. This has immensely helped us over the last few weeks to run our operations relatively seamlessly. All our essential businesses — business requirements are being fully met during this lockdown by enabling work for home for the critical staff. 95% of ATMs in noncontainment areas are working without any disruptions or cash outages. 98% of our overall branch network has been operational during the nationwide lockdown. We have beefed up our information security and cybersecurity risk measures to mitigate potential risk and threats during this period.

Before I discuss details of the financials and the events relating to COVID and the likely impact on FY ’21, I thought it’d be useful to lay out at a little higher level as to how we are seeing this period in the longer correction phase we had embarked upon in July 2019. In some manner, what would the bank be when COVID is substantially addressed?

First, we had acknowledged that some concentration issues in our wholesale business portfolio would be progressively addressed. That is on the mend and will be pursued systematically this year also. Second, we had identified real assets, cards and financial inclusion as the areas of continued investment and building eventually market-leading franchises. Even as we take additional credit costs in these areas because of COVID, we believe that post-COVID, they will revert to becoming key drivers of our RoA and gain us market leadership. To that, we add building organically a secured housing business — housing loan business. That investment is being maintained. Thirdly, expansion of our deposit franchise will continue getting the focus, except the combination of physical and — except that the combination of physical and digital has become even more interesting for us given the customer behavior during these last 6, 7 weeks. Finally, continued investment in technology, cloud, analytics has helped us significantly in maintaining our services during the lockdown period. We are going to bet more on this in the months to come. This will eventually build significant operating leverage, especially in retail and rural, when these markets come back post COVID.

Moratorium. Now we will quickly talk about the COVID-related moratorium under the RBI guidelines. Please note that the data is as of April 30. In micro banking, our collections for March were completed before the lockdown. In the micro banking and Agri segments, which is 13.5% of our advances, we have since extended it to all our 3 million-plus customers and supported it with an outreach program to almost all of them. In credit cards, which is 18% of our advances, while we offered the moratorium to all our 2.8 million customers, approximately 13 of them have availed it — 13% of them have availed it. In retail loans, which is 22% of our advances, again, while we offered it to all, 46% of the customers have availed the moratorium. On the wholesale side, which is 44% of advances, about 22% of the customers have taken the moratorium. In respect of these wholesale clients, who have asked for moratorium, we have assessed their business requirements, discussed the impact and implications of opting for the moratorium and given it to customers on the condition that all their other lenders also gave them the moratorium. We have proactively taken some COVID-related provisions on the retail portfolio, which we will discuss a little later. We have also undertaken a thorough review of portfolio under various scenarios. In the credit cost and NPA estimations, which we will detail later, our base assumption is of an extended lockdown until early June and for life to limp back to normal in a gradual manner thereafter.

Now let’s talk about the performance highlights for Q4 and the full year FY ’20. Briefly on performance highlights for this quarter. Advances grew 7% year-on-year, declined 3% sequentially from the previous quarter. Retail, wholesale’s advances mix was 56% and 44%, respectively. Our wholesale business declined 16% year-on-year, 13% sequentially, reflecting the planned portfolio redesign. Nonwholesale businesses continued to grow 35% year-on-year and 7% sequentially. Deposits overall marginally declined 1% year-on-year. However, based on the muted asset growth and the capital raise in December 2019 end, the bank maintained surplus liquidity throughout, in fact, significant surplus liquidity throughout the full year. Our average LCR for the full year was 154% and for Q4 itself was 161%. As we reported previously, there was some decline in deposits in March because of specific circumstances prevailing in that month. However, we are pleased to report that all deposit segments are now stable and growing, and our deposit position as of April 30 crossed INR 16,300 crores, which is up 4% from March 31.

CASA deposits grew 17% year-on-year and 2% quarter-on-quarter. CASA percentage was 29.6% as of Q4 FY ’20. This is against 26.8% previous quarter and 25% for the same period last year. Pertinent to note that CASA grew sequentially in Q4 2020. CASA ratio, in fact, as of April 30, on a higher deposit base, is approximately 31%. Our cost of deposits fell 31 basis points to 6.4% sequentially in this quarter.

Our branch expansion continued with 62 branches in FY ’20, again largely in metro and urban centers. We were actually on track to end the financial year with 400-plus branches, but for the lockdown, ended the year at 386 branches. In addition, we ended the year with 1,245 BC branches, of which 651 branches were of RBL Finserve, our subsidiary.

Revenue growth momentum was strong through the year, growing even into the fourth quarter. Fourth quarter total revenue grew 8% sequentially to INR 1,522 crores for the quarter. And for the full year, the revenue was INR 5,540 crores, which reflects a growth of 39% year-on-year. Our NIMs were at 4.93% for the quarter, a new all-time high. For the full year, NIMs were 4.56% on the average, which were 42 basis points over the previous year.

Net interest income growth momentum was also strong, both sequentially and for the full year. It was INR 1,021 crores for Q4, 11% sequential growth over our previous quarter. And for the full year, NII was 43% higher at INR 3,630 crores. The overall yield on advances improved 19 basis points quarter-on-quarter to 12.53%, again largely because of the business mix.

Noninterest income also grew 3% sequentially to INR 501 crores for fourth quarter 2020. For the full year, noninterest income grew 32% to INR 1,910 crores. Our core fee income grew 29% to INR 1,743 crores.

Our cost-to-income ratio was 49.7% for the quarter and 50.3% for the full year FY ’20. Our pre-provision operating profit, PPOP, grew 4% sequentially to INR 765 crores, and for the full year, it grew 42% to INR 2,752 crores. As a result of the above, and after taking necessary provisions, PAT for the quarter, profit after tax for the quarter, was INR 114 crores and for the year was INR 506 crores.

In terms of asset quality, our gross NPA closed at 3.62% as against 3.33% at the end of the previous quarter. Net NPA was, in fact, marginally down at 2.05% as against 2.07% in the previous quarter Q3 FY ’20, as we took higher provisions to increase — significantly increase our PCR. PCR percentage was increased by 6% from 58% to 64% as at March 31, 2020.

Our overall SMA-1 and SMA-2 as of March end is 0.38% and 0.55%, respectively, lower Q on — quarter-on-quarter. After taking the impact of the standstill as per the April 17 RBI circular, SMA-1 was only 0.09% and SMA-2 was 0.44%. On this portfolio, we have taken actually the full 10% provision.

In this quarter, we fully recognize the remainder of the stress of approximately INR 300 crores on our legacy stress corporate book of INR 1,800 crores. After taking additional provisions in Q4, the total provisioning is in excess of 60% in respect of these needs. We have proactively taken INR 115 crores of additional provisions on account of COVID. This includes the following. Based on the April 17 circular requiring provisions on the standstill accounts, we have taken the full 10% in this quarter itself rather than 5% each in this and the next quarter. In addition, we have taken accelerated 100% provisioning as opposed to our normal policy of 70% on the existing NPA book of credit cards. We have also taken additional contingent provisioning on the overall retail book.

In order to raise our PCR, as I said earlier, we have significantly added to our provisioning on existing NPAs, largely in the corporate portfolio. PCR is now 64%, sequentially 6% higher as compared to Q3 FY ’20.

Talking about liquidity and capital position. While we have briefly spoken about this earlier, we want to emphasize that we are maintaining excess liquidity of INR 7,000 crores to INR 8,000 crores at present with LCR averaging in excess of 155% or 156% in April. Even so, we continue to grow deposits sequentially and target further granularization of the same based on a much larger retail franchise, which is now operational with our additional branches. Given our recent branch expansion, we expect deposit traction to grow at a healthy pace once the restrictions are lifted. Expansion plans for FY ’21 encompass both physical branches and technology-led branches — led services — technology-led services.

We have been ramping up our digital platform, and I want to briefly highlight some of the trends that we are seeing. We currently acquire 500 savings accounts per day digitally. We expect to increase this to 1,000 per day over the next 3 months. Digitally sourced RDs, FDs have doubled over the last few months, and digitally sourced deposits are now 65% of all retail deposits. Our chatbot RBL Care launched in January this year is seeing more than 1 million conversions per month, of which 40% are new customer inquiries.

On our capital position, our equity raise in December end has helped us maintain comfortable levels of capital. We ended the quarter with our capital adequacy ratio at 16.45% with a CET1 of 15.33%.

Now let me talk a little bit about the COVID assessment. We’ve done a thorough bottoms-up review across our wholesale and all our segments of our retail businesses. Based on the above-mentioned base case scenario and its consequential impact, we have estimated that the level of resilience of the portfolio or over — we have estimated the level of resilience of the portfolio over a relatively prolonged recovery cycle. We have tightened our risk assessment criteria across the board. Particularly on the corporate side, we continue to reduce exposures through timely intervention and proactive management. This is further to the steps that we took in the previous year where we significantly rightsized our entire portfolio under review and our new target operating model for the wholesale business, which is based on a significant debulking of the portfolio. As a result, our concentration in top 20 and top — top 10 and top 20 borrowers and groups has declined sharply this past year. Our top 20 group exposures have reduced by 4% to 18%. Majority of our incremental exposures this past year have been to A minus and better-rated customers. A minus and better-rated customers account for 72% of all our rated exposures now, up from 67% in FY ’19. The reduction in exposures in the BBB and below rating scale have further derisked the book. All these measures put us on a better footing as we tackle COVID-related challenges.

Customers in wholesale, who have availed morat, have almost — are almost fully secured and with sizable levels of liquid hard collaterals and route at least a proportionate share of their operational cash flows through us, giving us enough insights on their operations. Our approval is also conditional on other banks approving their morat request as well.

We have done similar analysis on our retail portfolio. In the retail business, you would be aware that over the last 3 quarters, we have been continuously tightening our acquisition filters towards the relatively low-risk segments. We did sacrifice a little bit of growth in doing this. Even on the portfolio front, we have started taking steps in bringing down exposures on the relatively riskier segments. We have done a detailed stress testing of our cards and business loans portfolio and have already laid down our collection strategy, including significant enhancement to the collection capacity. In the micro banking business, we are continuously engaged with our customers, and we are quite confident that the bounce back to normalcy will be much faster.

Pre-COVID, we had expected our credit cost to be much lower in FY ’21 as compared to FY ’20. However, based on the above, we expect credit cost in FY ’20 (sic) [FY ’21] to be in similar range to FY ’20, give or take, 5, 10 basis points. Within this, we expect the split to change from more wholesale and less retail to the reverse, where we expect wholesale and nonwholesale split of credit cost to be approximately 40-60.

At this point, I will hand over to Harjeet, my colleague, to take — to give you much more detailed color on our nonwholesale businesses, and I will come back later to do a wrap-up.

Thank you, sir. Good evening, ladies and gentlemen. I will try and cover details of the nonwholesale business in 2 parts. First would be to give you some insight on the strong business performance in quarter 4 FY ’20. Then I would talk about the business environment that we expect to be there for another 6 months and how will we navigate it. As already mentioned, in quarter 4 FY ’20, the nonwholesale business grew by 35% year-on-year and is now 56% of the total advances. The retail loans business grew by 41% and the financial inclusion business by 23%. The overall growth could have been more this quarter, but for the lockdown towards the second half of March ’20. About INR 800 crores of loans could not be disbursed in this period. Yields on the nonwholesale business were flat quarter-on-quarter at 15.6%, but were up 100 basis points year-on-year. The credit card business issued 3.5 lakh cards in quarter 4 FY ’20, taking the total number of credit cards in the portfolio to 2.8 million cards. You would notice that the new card issuance in the last 3 quarters has not shown much growth. This is on account of tightening of customer acceptance scorecards since quarter 1 last year and cutting out 20% to 25% of business, which we felt could be vulnerable. This was done much before the COVID-19 problem came to the fore and should stand up in good stead going forward. The credit card spend was similar to quarter 3 FY ’20 at INR 8,250 crores. The usual growth in spend was countered by the drop seen in March 20 post lockdown. Approximately INR 500 crores of spends were lost on account of the lockdown. Spend reduction in March also resulted in the more than usual bump-up in the term book percentage, which was at 47%. Adjusted for the spend drop, it would have been around 45%.

From a risk perspective, term balances are better, as the risk — as the portfolio consists of 75% customers that are pure transactors, and hence, these balances are at significantly lower delinquencies. The spend drop plus the moratorium-led late fee reduction resulted in a fee income drop of around INR 15 crores in March.

The micro banking business grew by 28%, while the MSME business, on the other hand, grew by 25% year-on-year. In the micro banking business, we were able to complete almost the entire collection for March 20 before the lockdown. We were, however, not able to complete our new disbursals for the month.

Let me now talk about the business environment outlook. We’ve seen gradual lifting of restrictions start from 4th of May. While the green and orange zones will see faster removal of restrictions and resumption of economic activity, we believe the red zones will take longer, and we can see somewhat of smooth movement of people only by end June, July. We have planned our business for this year accordingly. We expect the rural economy to pick up first, especially in the segments we operate in. This is on account of very low infection rates, good crop and monsoon forecast, government stimulus and also due to localized operations of our customers’ business. These are largely micro businesses providing essential services and will bounce back within a few weeks of the lockdown opening. We’ve been touched with around 2.5 million customers in the villages and found that majority of them are confident of getting their businesses back on track.

We today have 853 of our BC branches, around 80% of the total, which are already open and have also seen some bit of economic activity return for our customers.

In the business loan — for the business loan customers, that is LAP, it will take much longer to recover from this shock. Within these businesses, those focused on domestic markets and consumption will bounce back much faster than those having exposures to international markets in terms of imports or exports. Retail goods, groceries, essential services, pharma, FMCG, hospitals, et cetera, will bounce back first. Businesses linked to aviation, travel, restaurant and entertainment will have a more difficult path to recovery. Fortunately, our exposure to this segment is less than 5% and even that is backed by collateral. The moratorium is well received by this segment as their EMIs just shift by 3 months and the tenure gets extended accordingly. The EMI amount remains the same, which does not cause any burden.

In the credit card segment, we’ve seen a unique behavior in terms of customers trying to conserve their cash flows and opt for moratorium. This is the cross segment, salaried and self-employed. Salaried is about 70% of our customers and also across risk. It does not even discriminate between customers who are paid in full versus those who revolve. The good part is that only about 13% of customers have availed the moratorium till end of April 20. We’re also observing that customers are making payments during the month to reduce their interest cost.

We expect the impact of any job losses to be felt over a period of time. Even if job losses are not significant, we can expect salary freezes, deferment of bonuses, incentives and in some case, salary cuts, which could cause some pain.

Let me outline some of the immediate focus areas we’ve been working on. The first is collection capacity build up. We expect significant loading of early delinquency buckets when the moratorium ends. For this, we’ve already added extra capacity both at the telecalling and field level. In addition, we’ve moved some resources from business to collection for the next 3 to 4 months. On an average, the collection capacity across our retail businesses has been expanded 2.5x. During this lockdown, our collection call centers have been operational and have been operating from home.

The second focus area is regarding portfolio interventions. In our cards portfolio, you would recall that over the last few quarters, we had been intervening on customers, which could be relatively riskier by reducing our exposures to them. We’ve been reducing limits for some and for others converting outstanding balances to EMIs at low rates, where we believe that their ability to pay interest in the future may be impaired. In addition, advanced early warning triggers based on the bureau and other transactions are being used to pick up risky behavior early and cut exposures. All other positive actions like limit increase, loan on phone, balance transfer, et cetera, have been temporarily suspended.

In loans, we have put a significant part of our portfolio on daily enhanced bureau triggers. Objective is again to pick up early warning signals and suitably modify the collection strategy proactively.

In micro banking, as mentioned, around 853 branches already open. We have near nil attrition and have been able to get all loan officers to join back. This was facilitated by the fact that all staff were paid their salaries in April. We’ve explained the moratorium to customers, and they are happy with the facility and are confident that they would start paying the moment their businesses start.

I would now like to give you some portfolio insights in terms of customer segments and the risk levels we are carrying in some of these portfolios. We’ve also included some of these points through additional slides in the investor deck this time. First, I’ll talk about credit cards. 70% of our customers are salaried. The self-employed acceptance criteria for the balance is much more stringent, and therefore, delinquencies are only about 30 to 40 basis points higher than salaried. 82% of our customers have another credit card at the time of a card being issued. We refer to this as the carded segment. 95% of these customers have cards issued by the top 4 players in the industry. Therefore, our carded segment is quite similar to these top 4 players. These carded customers typically have loss rates that are 50% of those where there is only a single card. This has been tracked and published by the Credit Bureau. We also observe a similar trend in our own portfolio. 68% of our customers have an age greater than 30 years as compared to 60% for the industry. The higher age group denotes more stability in terms of profession and lifestyle, as these customers have more work experience and also support a family. The delinquency level also decrease with age as is seen in the portfolio. 70% of our customers have an existing relationship with either RBL or BFL, Bajaj Finance Limited, where we have additional information and comfort of knowing the customer, and all these are credit tested. The most important fact is that our portfolio delinquencies measured at 90 days past due rate are 27% lower than that of the industry. And we should keep in mind that the top 6 issuers, including us, account for 90% of the industry. Similarly, our early vintage delinquencies measured at 6 months for 30 DPD are around 28% lower than the industry.

I’ll now come to micro banking. Our state and district level caps ensure that we don’t have concentration in any particular geography. The top 5 state contribution has been coming down and is now at 56% versus 62% for our peers. And the peers include 2 of the largest banks in the segment, 2 large SMEs and 2 prominent MFIs. 97% of districts have less than 1% concentration to the portfolio. Only 10 districts have a contribution between 1% to 1.5%, and just 2 districts, which have been our traditional districts have between 1.5% to 2%, all well within our caps. The average outstanding per customer is at INR 21,100 versus nearly INR 25,000 for our peers. Even our average ticket size for new loans is at about INR 34,700 versus INR 40,600 for the industry. Our business growth has been driven by new customers in newer geographies rather than ticket size growth. Ticket size has increased at just 7% per annum over the last 2 years.

Now let me come to loan against property. Average ticket size is around INR 1.4 crores and has been consistent over the last few years. Average LTV on the portfolio is around 63%. 95% of the collateral is residential or a business premises, majority of which is self-occupied. There is an even mix between manufacturing service and trading. So there’s no concentration to a particular type of business. Exposure to industries impacted by COVID is less than 5%.

Let me now give some color on our expected business trajectory. In our base case scenario, for our retail businesses, we expect our new business to have a slow start post lockdown, reaching 70% to 80% of our BAU run rate by September and October. Overall, for the year, new business will be slightly lower to flat versus FY ’20. For FY ’20, the cards base is likely to end around 3.3 million versus 2.8 million today, an addition of roughly about 500,000 to 600,000 cards. We have — overall advances are expected to grow in the region of about 12% to 15%. We have the ability to ramp up businesses should the opportunity arise in terms of stability in the economic and credit environment, and we don’t expect demand to be a challenge here.

With that, I would now like to hand you back to Mr. Vishwavir Ahuja for his concluding remarks.

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Vishwavir Ahuja, RBL Bank Limited – MD, CEO & Director [4]

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Yes. Thank you, Harjeet. So I want to leave you with a few thoughts in summary. If I have a look at FY ’21 relative to FY ’20, our journey perhaps has been delayed by 8 to 10 months because of COVID. The COVID situation will impact almost all of the financial services industry, and our endeavor would be to exit FY ’21, not just stronger in balance sheet, risk management, liquidity provisioning but also come out sharper on strategy and stronger in the competitive position in our chosen segments and markets. We have the necessary scale, capital, talent and the abilities to do so. We are confident of being able to deal with the challenges that we may encounter on account of COVID. Our focus in the near term will be on balance sheet protection, tight risk management, capital preservation and maintaining high levels of liquidity and cost management. In our wholesale business, we will continue to consolidate and rightsize our exposures given the external environment. In our retail businesses, our focus will be on boosting our collection efficiency and close monitoring of the portfolio and selectively growing our business post lockdown.

Our provision coverage ratio has been significantly increased, now 64%, and we propose to increase it further in the subsequent quarters. We are extremely well positioned in most of our retail businesses, where because of the underlying demand, they have the propensity to bounce back strongly when there is a revival post COVID. There is a huge operating leverage embedded in these businesses.

Meanwhile, we will ensure that we continue to invest in our deposit franchise through both branches and digital solutions. We will also ensure that CET1 is close to 15% for FY ’21, which reflects robust capital adequacy. The regulatory requirement is 11.5%.

Okay. Okay, sir. So my second question is if you can provide some — throw some light on how do you see your BB and below book moving in FY ’21? How much slippages can we expect from there or what scale built up can you see?

Sir, just on the Slide 23, when we are talking about certain exposures in BB and BBB, which are slightly lumpier, if you would share some color on which sectors they are from and what kind of outlook do we see on those exposures?

There’s no sectoral kind of a story around it. It’s diversified across the board there. So if you — I mean, especially — I’m only talking about the large exposures. and the 3 — 4 that we’ve spoken about and — BB, we’ve spoken about, total about 5 exposures that are kind of relatively larger and for a couple of them in the BBB space. Again, no single sector or anything. Of — there’s just — I think this is kind of, as we said, diversified, secure, except for that one exposure that we’ve clarified in BB, which is unsecured and nonfunded, which is something that we are watching. Absolutely. That’s a telecom sector exposure.

Right. But sir, just to understand on these 6, 7 exposures, what kind of a probability are we internally assuming in terms of default? Just to get a sense on what kind of slippages can come from the wholesale piece.

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Vishwavir Ahuja, RBL Bank Limited – MD, CEO & Director [29]

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You want same thing.

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Jaideep Iyer, RBL Bank Limited – Head of Strategy [30]

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I think that situation will evolve. I think a lot of big names, I think one odd may be a little worried. I don’t think in other cases — I think the reflection of the rating is not necessarily reflective of the strength of the company at this stage is what we believe. So I guess you should be worried about one odd name.

Sure. And sir, like for FY ’21, we are guiding for higher credit cost from retail vis-à-vis wholesale. So within that, any particular segment where we are expecting a slightly higher mix in terms of credit cost within, say, cards, MFI or LAP?

So if you look at it, I mean, the — in the COVID kind of a situation, you would expect credit costs to come from cards because of job losses. And you would expect the business segment or the MSME segment to give you some credit cost as well because that segment will take time to recover. The micro finance, we do not expect — while you will have little enhanced credit costs, but I don’t expect any significant increase there because that segment or that sector, we are expecting to bounce back much quicker.

Sure, sir. And sir just lastly, on the MFI piece, if you could share the split around the portfolio value wise in terms of, say, the rural, semi-urban and urban locations, how is it? And also, in case there are any recoveries that we have seen from the 4, 5 stressed asset groups, which has slipped in FY ’20?

We take the next question from the line of Abhishek Murarka from IIFL.

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Abhishek Murarka, IIFL Research – VP [44]

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So 2 or 3 questions. First, on the MFI side, you said that 800-odd branches are now operating and all your field officers are back. But can you give some color on whether they are able to hold center meetings or collect anything at this point of time given that anyway, we are in the moratorium period? And if there is any kind of incremental disbursement being done either as an emergency loan or any kind of demand? How is that being met?

Yes. So — okay. So I’ll answer this first. So understand that the majority of these branches have opened in the last 1 week or so post the 4th opening. And therefore, the initial lot of loan officers have visited the villages and met customers. Too many center meetings have not yet started. That is something which will happen as we go forward. From a collection point of view, we still had voluntary collections, which are coming in, where customers walk into our branches and give that collection. Since we’ve not held center meetings, we have not yet introduced the emergency or the cash loan or the small ticket loan, which we will do. So there is a plan to give loans ranging between INR 6,000 to INR 10,000 to customers who demonstrate repayment of their EMIs. And that, I think, will happen over the next 30, 45 days.

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Abhishek Murarka, IIFL Research – VP [46]

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Okay. Okay. The second one is on cards. So a, given that spends are likely to come off quite significantly, what is the outlook on your revenues and the margins, et cetera, that you would be making from this business? Second, actually, before that, to your slide on this spend almost bouncing back right from June to March, what is the probability you assigned to this forecast? Because end of the day, it’s a forecast, and you yourself, in your opening comments, you said that things are going to slowly come back to normal over a longer period of time starting June. So isn’t this a little aggressive to expect that between June to March, the spends will be pretty much back to December, January, February levels?

Yes. So look at it this way. If you look at the composition of our spend, you will find that the spend contribution from areas, which will remain affected over a longer period of time, are much lower. That’s one. Second is that while we — in the month of April, we saw our spends go down by about 60-odd percent. Since May 4, there’s been a 35% increase of spends from that level. Just the fact that some markets have started opening. We still — and majority of the red markets are still not open. So there is a pent-up demand, which is there, which I think will therefore be able to bring the spends up. And there are categories of spends which have, therefore, taking over, groceries, utilities, digital, entertainment, media. Those are the spends, which are coming to the fore, insurance and therefore, that’s giving us some confidence that it should come back. When I was talking about it slowly coming back to normal, it was more in terms of movement of people meeting customers, et cetera, in the red zones. That is what is going to take. But the moment online opens up, and even before COVID, about 55% of our spends were online. We expect that proportion to go even higher post COVID.

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Abhishek Murarka, IIFL Research – VP [48]

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Okay. And just lastly on this deposit. So you gave a CASA number as of April 30, what would be the retail TD number at that time April 30?

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Vishwavir Ahuja, RBL Bank Limited – MD, CEO & Director [49]

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I think that data is also noted there, 50-some percent.

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Jaideep Iyer, RBL Bank Limited – Head of Strategy [50]

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Yes. So Abhishek, I think branch banking for deposit should be in the 59%, 60% range.

A couple of questions. First is on the cost front. Just if you could give some sense of the overall FY ’20 OpEx, how much was attributable to the MFI and the credit card business? And the second dimension to it is, in the overall cost, how much is sort of variable linked to business? And can we sort of rationalize if growth doesn’t pan out as expected? So some sense around the cost.

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Jaideep Iyer, RBL Bank Limited – Head of Strategy [61]

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So Dhaval, if you look at the cost increase in fiscal ’20 versus fiscal ’19, approximately 75% — 70%, 75% of that should be business linked and bulk of it to cards. And I will probably let Harjeet to elaborate. But in micro finance, there won’t be much cost because the BC payout is actually netted from the interest income. And besides that, the cost is not — a whole lot significant. And almost all business in micro finance and cards, a large chunk of it that is variable because there’s a lot of origination cost, which is paid upfront on origination. So if business slows down, a bulk of the cost will come down.

And overall sort of ability to sort of manage costs, do you see, I mean, some sense around that fixed variable and — yes.

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Jaideep Iyer, RBL Bank Limited – Head of Strategy [63]

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Yes. So I guess, as I mentioned, I think the retail businesses mostly will be running on variable costs. So a slower business would mean a slower increase in cost. And overall, I would expect us to — because we inducted in branches last year, which will become fully positive this year and we’ll open more branches, I would expect about a 10% to — not more than a 5% to 10% increase in — actually not even 5%, maybe low single-digit increase in costs over the coming year.

Understood. And the second question is on margins. So I understand that the mix shift is driving this expansion along with the funding cost coming down. Just in the context that next year, you do expect a rise in retail slippages and that too in the cards specifically, how does the, I mean, interest income impact and overall margin outlook, I mean, look like for next year?

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Jaideep Iyer, RBL Bank Limited – Head of Strategy [65]

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So Dhaval, I think quite a few moving parts on margins, but I would say, we should be coming off a bit on margins, primarily because we will continue to sit on a lot of liquidity, and that would be one reason. And second, I think the mix change will not be as dramatic as we saw in this year. So I would say margin flattish to slightly lower because the yields and — the benefit of cost and the yields will largely go in tandem.

Right. And the last one is on this stress test that you guys carried out on the retail portfolio. I mean, what kind of income impact have you assumed to arrive at some of the stress numbers? And if you could just elaborate a little bit of — I mean, how much bad it can be? I mean, some color around income impact and the impact on our portfolio.

Sorry, Harjeet, actually, what I was referring to is the existing portfolio and consumer — I mean, what kind of impact have you assumed in the borrower profile as far as their income is concerned, just to understand on the stress test? How — I mean, any detail that you could share on this? How you approached the entire stress test? That would be useful.

No. Okay. So the way we’ve gone about doing this is that we’ve assumed that the current level of moratorium, and therefore, the deferment of — I mean, customers not paying, would continue for a good 3, 4 months. And that would build up your front-line buckets, which would then — the resolution rates also would come down because of the kind of impact, which will happen. It’s very difficult to assume the job loss rate at this moment or the reduction in salary levels. So the best thing we can do is to see how many customers would, therefore, not be in a position to pay and therefore would flow through and what would be our resolution rates. So we’ve deteriorated both, we’ve increased the entry into buckets and deteriorated the resolution rates for at least the next 4, 5 months. And that is what will result in whatever cost — credit cost increase which we will see.

Understood. And just 1 related question to this, important number would be the moratorium because that is your anchor. How has that number moved? Maybe the last 15 days versus where we are at the end of April? Just to understand how this percentage is moving. Is it like grown substantially in the recent weeks? Or has been steady after the initial increase because that will change the entire calculation there?

Yes. Yes. So it’s a pretty dynamic number. So it actually started with a higher number in cards, and then by the end of April, came down because customers didn’t make payments. So — but I expect this to remain at this level till the moratorium doesn’t finish. We have this — and it’s a little complicated because you have cycles of payments when it happens. So every time a cycle ends, the moratorium number goes up and then balance of the month, the customers pay back, and therefore, that number comes down again. So on average, I think it’s safe to assume the number which we’ve given will stay.

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Operator [74]

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We take the next question from Pranav Gupta from Birla Sun Life Insurance.

Yes. Sir, firstly, on the moratorium on the wholesale side. So you spoke about 22% in terms of number of customers and value availing the moratorium. If you could give some sense on the discussions that you’ve had with these corporates on whether — what are the reasons why they’re looking to avail this moratorium? Is this to conserve liquidity? Or is this because of the top line impact that they might have seen? Some sense on what discussions you would have had with these customers?

It’s a — actually, it’s a mix of a lot of these things, including for some people, just wanting to keep a liquidity buffer as they get through this phase. So it’s a mix of reasons that we see. Given that it’s not been a automatic model. So we kind of reviewed every case. And looked at the COVID impact that have happened — have impacted their business during this period and as we see the road ahead. Broadly speaking, I think for some people, it’s obviously business currently not functioning at the level that they would function or revenues not showing up. It’s a broad mix. It’s — and it’s come from across the scale of ratings. It’s not isolated to somebody weaker or stronger. It’s across the scale.

Okay. My second question is on the additional provision related to COVID that you have taken. So just to clarify, this is all the 3 included that you spoke about, right? So 10% on the RBI — as per the RBI guidelines, 100% instead of 70% on the credit cards, NPA and an additional buffer on the retail book. Is that right?

Okay. Okay. And on the card front, you’re saying like 24% of value have taken moratorium. Just is there any difference between someone paying a 5% and revolving and taking a moratorium from a interest charge perspective?

Yes. But unfortunately, it’s not only the revolving guys who have taken the moratorium, which is what I was saying. This is — there is this general behavior to conserve cash. So we’ve seen almost about half the customers who have taken moratorium actually never evolved. They were all — they used to all pay in full. So it’s just that people have just felt that for some time, let’s just conserve cash and then see how things happen. And that is why over the period of the month, then you see some of them start paying back and the moratorium percentage then starts coming down.

Okay. And on the fees related to card, now if a large proportion of the cards are used for grocery spend, then I would assume that the per spend fees for us would also be lower, right, as I understand, groceries earn us less than cards used anywhere else?

No, not very dramatically because it depends. The large stores, sometimes you get lower fee, but smaller stores, that’s not the case. But if you really look at it, while proportionately, it looks like as if grocery has really jumped up, it’s only for these 2, 3 months. Ultimately, it will come back to the spends before the lockdown, where also we had 30% spends going to grocery and stores.

Okay. And look, we make about INR 250 crores of fees on cards. Now with spends down like 60% in April and maybe, say, 30% on an average for a few months. Would it be right to assume that fees on cards should also decline a little bit more than that 30% number?

So Manish, you’re — so about 1/3 of the fee comes from interchange income from spends, okay? We — and this time, I don’t know if you’ve had a chance to look, but on Slide 51, we’ve given you our forecast on spends. So on a full year FY ’21 basis, we expect the spends per card to be about 12% lower. So it’s on that 1/3 of fee where we will lose 12%. So fee, yes; on pure spend fee, there will be a drop. But there is going to be some increase on the interest income. Because as your first part of the question, which you were alluding to, because of the fact that many customers have availed moratorium, the interest incomes will go up.

So the — broadly, you can divide it into something called application and processing fee, which we have, which is the fee on the card plus whatever cross-sell we do in terms of either conversion to loans or insurance or et cetera, there is a cross-sell fee, which we do. That’s about 1/3. 1/3 is the spend fee. And 1/3 is the other fee, in which the large component is the penalty, which for the moratorium period is what we will not get.

So this is basis, well, the risk bands. So there are customers who would have gone through a very, very sharp reduction, but that’s on the upper end of the high-risk band which we see. For majority of the customers, the limits will remain where they are. But whenever we see any trigger, we’ve cut limits and the limits could be cut from 20%, 25% to all the way down to 80%, 90% as well, depending on what we are sensing from the customer.

Okay. Okay. And lastly, on the cost front related only to cards, now I believe that you’ll have to invest a lot on collection, which you also alluded that your collection capacity has gone up by 2.5x. Is there a scope to reduce costs on the card front itself because at a time when revenues would be down, costs probably may come into play because generally, it’s a heavy cost product? So — but if you have to spend on collections, then the cost ratios can change on the negative side for us?

No. So look at it this way, a large — so I’m going to acquire slightly lesser cards than last year on a base which is almost 70%, which is higher than last year. Therefore, my cost to A&R will drop significantly this year. And that is what is going to, therefore, partly take care of the credit cost increase, which will come. It’s — despite the collection cost increasing, the other costs, which are dropping, is very sharp.

Just 1 clarification. On the credit cost. I know — I don’t know whether you’re going to answer this question, but I’ll try this out again. Is there an arrangement on the credit cost between your relationship with Bajaj?

Okay. Perfect. Just to kind of — just to take this back again. So the question that you indicated that this year, the retail cost will dominate the cost. Outside of cards, are you worried on some of the other products like a business installment loan and probably businesses, which you’ve originated through channel partners?

So business — all our business loans get — majority of them get originated through channel partners. I don’t think the channel of origination has any bearing on the riskiness of the customer because the credit assessment, et cetera, is all being done by bank officers who are credit officers. The channel only helps in getting the customer to you, and therefore, helping you complete the documentation. So I don’t see that stress.

From a business installment loan perspective, which you’re talking about, that portfolio is about 2%, 2%, 2.5%. Yes, being unsecured, we will see an increase there. But the large part of business loans sit in LAP, where — as I had mentioned earlier, I think that’s a fairly granular book, very secure, traditionally much lower, almost about 44%, 45% of the industry credit costs, that should sustain. And even if we see some NPAs coming there, the ability to be able to, therefore, get back our loan exposures will be very high. And the credit cost there, in any case, it being secured, is only about 15%. So it’s not going to cause a big blip to the credit cost number.

Cards will be the large part. The other part, which will come in is whatever little comes from the unsecured businesses or the small MSME business, which we have, which is about INR 1,100 crores or so in the DB&FI space. But those numbers are relatively smaller because the portfolio is small.

A question here on the SME data. Thanks for sharing this, but one of the challenges that one sees is that the relationship between the SME data and the slippages that one sees appears to be fairly low. You seem to be showing extremely quick slippages once it reaches SMA-1 and 2. Is that a fair observation?

I’ll just kind of explain this question. So if you look at, you had about INR 700 crores of slippages, INR 709 crores of slippages this quarter and you had about INR 1,050 crores a quarter before and INR 1,377 crores in 2Q FY ’20. Can you just go through — sorry…

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Vishwavir Ahuja, RBL Bank Limited – MD, CEO & Director [141]

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Yes, yes, yes, we got your drift. The…

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Jaideep Iyer, RBL Bank Limited – Head of Strategy [142]

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So Mahesh, this quarter, we have recognized NPAs besides the necessarily not on the DPD basis also.

The — much of what happened in ’20, ’21 in the last 3 quarters was largely because of a specific handful of names, which we have talked about repeatedly. And in fact, bulk of the stress has come from there. And those names, the previous year were…

Not in the SMA buckets, yes, for nobody. For no bank. And they were, in fact, rated very well. So it was just one of those circumstantial things that happened, aberration. That 2, 3 promoter oriented groups, which had high levels of promoter leverage, we’ve gone through that story many times. They need to — so it’s come from there. But otherwise, no. I mean, highly rated companies have remained highly rated companies and that portfolio sort of correlates well to its rating profile or credit profile.

Just a clarification here is that while we identified about INR 1,800 crores at the beginning of the year, they don’t seem to have moved into the SMA buckets in the first 3 quarters at the pace at which one would have thought. It just kind of seems to be suggesting that the continuity remains in either in SMA-0 or standard. But they quickly seem to have kind of come into SMA-1 and 2 and then slip off across. Is that the way to look at the INR 1,800 crores that you kind of indicated at the beginning of the year? That’s the question.

SMA is just a statistical number. We — some of it is our estimation of what will happen to these accounts, knowing that they are servicing as of today, but will get out in the next quarter or the following quarter, right? So this was estimates made by us upfront saying that these people can probably service up to this, probably up to this. And so therefore, our estimation was right in that they will slip. So it’s a question of then the SMA just becomes a statistical number as to based on DPD. So you’ll have to kind of isolate this 4-odd groups as an aberration to the whole process and then look at the rest.

Perfect. I’ll just take it off-line. My only point was that we should have seen it in SMA-1 and 2 in the previous — as in the bunch up of that INR 1,800 crores should have probably been seen in the SMA-1 and 2 in the earlier quarter, that’s the limited point, but let’s take this off-line.

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Vishwavir Ahuja, RBL Bank Limited – MD, CEO & Director [157]

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No, no, we will take it off-line. But if you go back to our commentary 2 quarters ago, there was not a single day DPD in any of them. If you see my July 22 commentary, where we gave a forecast, that none of these names are even 1 day DPD. But we know because of the fact that the circumstances that this is about to happen. I mean, maybe we spoke too soon. But having said that, the fact is they have fully serviced their June 30 interest on time without delays. So if we flag them, we flag them. Now was that right or wrong, we’ll know. But the fact is they were neither badly rated at that time nor did they start going into delinquency, but it was very clear that the the way the rapid dizzy in which the events were unfolding, that this is a question of a 1, 2, 3 quarter story.

Okay. Sir, just 1 last question out here. You’ve seen this — if you look at the front-line bank, it seems you have seen significant amount of improvement in the cost of funds as compared to where you see the most of the mid-tier banks. Have you ever thought of kind of revisiting your entire approach of — is there a thought processing to just be a simple credit cards and MFI bank because you seem to be building some level of expertise in that space? Is there a scope for a rethought into every business that why do we actually do wholesale banking at this point of time if it doesn’t generate the required profits out there?

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Vishwavir Ahuja, RBL Bank Limited – MD, CEO & Director [159]

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Okay, we’ll take it off-line. No, for 8 years, it paid the bill so beautifully. Just because of 1 year and 5 accounts, it doesn’t destroy a business. Why don’t you go back and backtrack the metrics of this business over the last 6, 7 years? And see, that on a, what you call your, on a risk-adjusted basis, what return it was throwing up. So it allowed us the space to build a retail business in this meanwhile. We didn’t reach this scale of retail business overnight. It has taken us some time and investments. So the fact of the matter is that we have run the wholesale business for almost 7.5, 8 years at a net NPA of less than 40, 50 basis points, which is why even with slightly higher cost of funds but with a decent margin, it may not be more than 1%, 1.5%, but with collateral income coming from fees, from foreign exchange, from cash management, the net return, net of 40, 50 basis points of credit cost or less actually, became a very decent business and it allowed us to build the institution over time and allow enough latitude to build a granular retail business, invest in branches, invest in technology, invest in platforms and then build a scale business. That was always the strategy.

My point was not that. My point was that, look, now you have built 2 excellent businesses on the cards and the MFI platform. We’re just trying to argue saying the other way around, have you just thought because there are card companies out in the world, which have proven to be successful models as well. So that’s what — that’s the only problem. I’ll take this off-line.

Actually — yes. The funny thing is that forget cards, I mean — and across the industry, when you even look at loan check bounces, the rates are fairly similar for salaried and self-employed. The rate of increase of check bounces. So that’s what I was talking about. There seems to be a behavior in which people are trying to conserve cash because they just want to pass a couple of months to see what is happening. And therefore, in overall quantum term, the interest cost is not that prohibitive. While the rate may sound very prohibitive in cards, it’s still — I mean, on INR 50,000 outstanding, the interest cost for 3 months is about INR 3,500. So it’s not as it’s that prohibitive. And therefore, that’s what seems to be driving the behavior.

Okay. And presuming this moratorium ends in May, how will you approaching this portfolio because everything will become due in June? You don’t have option to reschedule like you have in other segments. So are the customers aware of this fact? And will you be actively offering conversion to EMI, sacrificing some income, just to ensure that quality is protected over long term?

Yes. Good question. So currently, in this period, there is a very active plan for these customers, which is going on to ask them that if — should they want to convert to EMIs. And therefore, that’s where we would see customers who genuinely are seeing stress would therefore do that because they can at least both in terms of outflow as well as in terms of interest rate, they get a benefit. And the customers who have generally just taken it, then don’t take the EMIs because they know that once the moratorium ends, they’ll just pay it back. But as I said, half the customers who have taken this have never revolved before.

Right. And just finally, I mean, when you are doing your assessment of possible credit cost from this portfolio, do you think self-employed could still be where you would see significant increase in the credit cost versus salary, even though both would be using moratorium right now?

Yes, that is correct. Self-employed would be more, but understand that the self-employed proportion, one, is not very large, and second is currently from the starting base, they’re just about 30, 40 basis points higher in terms of their loss rates. But if I look at pure percentage losses, self-employed will be higher. But their contribution is not going to be very significant to the overall loss rate which we’ll see on the portfolio. Because ultimately, it’s a salaried portfolio, largely.

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Operator [174]

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We take the next question from the line of Sameer Bhise from JM Financial.

Just wanted to ask on the cards business. You said that a sizable proportion of people who have taken moratorium are on revolver categories. But if one were to think on revolver, should — if the situation persists slightly longer, is there is a case that the potential risk to the book, which is exposed to revolvers could be substantially higher than we can kind of estimate right now? Because, I mean, these customers from a approach perspective, find it better off to pay a 30%-plus interest rather than repay and close the outstanding?

Yes. So first, I had said that almost half the customers, who have taken moratorium, are not revolvers, which means they have always paid in full. So it’s not as if the proportion of customers taking moratorium and revolvers is higher than the other. Having said that, revolvers will always be higher risk than people who pay back in full. And that’s the reason why there is that interest rate which they pay.

Yes. Yes. Agreed, agreed. But could the quantum of risk, which follow — I mean, which flows through could be substantially higher than we can probably like because they were probably exposed to multiple cards or something like that.

Yes. So no, so multiple card is not the challenge. The — people with more cards actually have half the loss rates. I think the issue, which is there, which we are saying is that, if I’ve assumed if revolvers typically are at x percent loss rate, which we’ve assumed, can they significantly increase? Possible. But the way we stress tested it, we have assumed that the current proportion of moratorium will actually continue irrespective whether they were revolvers or transactors for 3 to 4 months. So therefore, within that, in normal circumstances, what will happen is — what is expected to happen is that the transactors will pay back and the revolvers will slightly increase. But on the overall, we’ve stress tested that as well. And the other piece is that there is, therefore, that active piece, which we are doing on the EMI conversion. So these people who are in stress, find it much easier if you convert their outstanding into a loan, let’s say, 1 year to 2 years in tenure at an interest rate, which is lower. And therefore that gives them the breathing time to be able to service the outstanding.

I think that people who wanted morat kind of took it. So I guess that’s the thing you will see now for another 3 months or so. So we’ll have to wait and see as to how does it pan out, but I certainly don’t see a whole bunch of people coming in unless there are huge job losses or the economy really goes down at you completely without any government stimulus, then yes, things could deteriorate a little further. But otherwise, it’s going to be more or less the same. You — I mean, percentage-wise it will be the same. The customers may change because some of the guys who are just holding it for a short period of time just conserving cash may then decide that 6 months is too large a time for them to bear the interest.

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Operator [181]

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We take the next question from the line of Kunal Shah from ICICI Securities (sic) [Edelweiss Securities].

Yes. Just I’m trying to tie one number, you highlighted that we had the drop of INR 15-odd crores, say on card businesses in Q4. And then if I try to correlate 1/3 of fee income, what you highlighted from interchange — intercharge and maybe spend for card to be like 12% lower. I think actually is impacting — it was only hardly 15 days in margins still we saw INR 15 crores kind of an impact on fee income. So wouldn’t the impact be much higher if we have to look at it in Q1?

Okay. Got it. And secondly, in terms of COVID-related provision. So there is no contingency buffer as such. Maybe wherever RBI was needed in terms of the SMA-1 and 2, that is what we have provided. And on credit card, maybe we have accelerated the provisioning. But besides that, maybe whatever we are seeing, that INR 300 crores is on the wholesale portfolio, and there is no buffer as such, say, for maybe the — in the coming quarters, whatever pain could come in from COVID?

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Vishwavir Ahuja, RBL Bank Limited – MD, CEO & Director [189]

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See, what this is…

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Jaideep Iyer, RBL Bank Limited – Head of Strategy [190]

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So Kunal, I think we have one, as you mentioned, accelerated the provisioning on wholesale. Second, we have taken the INR 115 crore provisioning that we had, out of which part of it is towards accelerated card provisioning. The other part is on the retail portfolio, where we have estimated basis some level of overdues, which were existing as of March 1. So it is on that portfolio, which is naturally be going to offset the — to that extent offset the provisioning challenge that will come later.

Okay. But besides that, there is no contingency as such, maybe retail is also based on the overdue on that day, yes.

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Jaideep Iyer, RBL Bank Limited – Head of Strategy [192]

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Yes. Because how do you otherwise assess, right? I mean, you have to assess basis something. And then we’ve also added to the stress sector provisioning, basis, sectors which we believe are — though the portfolio size for us is small, but we have taken provisioning there as well.

Okay. Sure. Sorry. And lastly, in terms of this wholesale, this entire recalibration strategy. So this quarter, we had some good rundown out there. So will this continue for a while? Or maybe more or less, we have achieved a particular proportion of it, and now we will go slow and the rundown will not be so high on the wholesale side?

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Jaideep Iyer, RBL Bank Limited – Head of Strategy [196]

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So Kunal, the pace of reduction was obviously higher in fiscal ’20. There will be margin reduction if we want to kind of forecast basis, whatever information we have now in terms of economy. I think the wholesale book will be marginally lower is our estimate. But not necessarily as sharp as we saw, let’s say, Q-on-Q.

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Operator [197]

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Well, ladies and gentlemen, that was the last question for today. We now conclude the Q&A session. If you have any further questions, please contact RBL Bank limited via e-mail at [email protected] I repeat the e-mail ID is [email protected]

On behalf of RBL Bank Limited, we thank you for joining us this evening. You may now disconnect your lines. Thank you.